BPO Subsector: Special Tax Rate Removed?

One of the reasons or possibilities that make doing business costly in the Philippines is the special tax rate. Moreover, there are recent news about this important matter given out by the Bureau of Internal Revenue (BIR).

The Bureau of Internal Revenue (BIR), scrapped off the special tax rate that helped a subsector of the BPO or Business Process Outsourcing industry for a very long time.

There was a tax advisory released last January 31 of this year with BIR Commissioner Ceasar Dulay stating that employees are now bound to regular income tax rates if they were employed by regional operating headquarters and regional headquarters (ROHQs/RHQs).

Before, employees are obliged to pay 15 percent of their gross income but now rules were different and changed since President Duterte has already signed and passed the Tax Reform for Acceleration and Inclusion (TRAIN) law last year December.

Ever since, a lot of uncertainties showed up putting thousands of jobs at risk. As a matter of fact, last year before December ends and before this advisory was given, there was a risk or danger for the fate of roughly 5, 000 workers who much appreciated the Preferential Tax Rate or PTR.

According to the TRAIN law that was passed December of last year, the industry was allowed to maintain the PTR only if the ROHQs and RHQs were established before 2018. Upcoming companies or businesses who are willing or would like to invest in the Philippines beginning of this year will not be allowed or granted of this claim based on the law.

A few days after the TRAIN law was processed and submitted, President Rodrigo Duterte authorized the tax claim and many gave their sides or comments about it. Tax experts and the industry itself are giving out specific problems that might occur in the future because of this claim and many got confused about the interpretations of the claim. Philippine Association of Multinational Companies Regional Headquarters Inc. (PAMURI) then stated that the status quo must be retained as it was said in the TRAIN law.

Establishers of these ROHQs and RHQs are the Multinational companies (MNCs) with the purpose of catering to branches, subsidiaries, or affiliates in the global market. MNCs are actually a great help to the Philippines for it gives a lot of opportunities and jobs to its citizens. Philippine Association of Multinational Companies Regional Headquarters Inc. (PAMURI) recently gave a statement about the MNCs; “MNCs relied heavily on the PTR in making their business decision.” Thinking that having a different tax rate for this 2018 will really give a huge impact on the business decisions of these MNCs.

The Philippines is just almost the same as of Hong Kong’s tax rate which ranges from 2 percent to 17 percent personal income tax. Singapore, whose tax starts from 0 percent up to 22 percent personal income tax, and Philippines being at 15 percent personal income tax.

As of what was said in the upper portion of this article, the TRAIN law has only two claims that could be granted of PTR, the first claim that permitted the special tax rate, and the second claim with ROHQs and RHQs that existed before the TRAIN law was approved and that’s before 2018.

Frustrations in this discussion according to PAMURI, was the president of the Philippines (Duterte) who only authorized a part or portion of the said provision. Question is, will the allowed special rate still be applicable if President Duterte only authorized a portion of it?

According to Pamuri’s last statement, “In order to give effect to [the provision] that still remains in the law as well as the veto message, the correct interpretation should be that ROHQ/RHQs registered before January 1, 2018 shall continue to be entitled to the PTR,”

Would this be a good strategy for the economy of the Philippines? Or would this be a saturated claim that would eventually lead to the downfall of both the Philippine System and its countrymen? With this law, workers of the BPO sector must pay their taxes accordingly. The law does not exempt their industry in this reform. Like all other workers in the country, the BPO subsector will soon start to experience “real tax” as some of Filipino workers would say.